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Cancellation and uncertainty aversion on limit order books

Abstract:

This paper models limit order books where each trader is uncertain of the underlying distribution in the asset's value to others. If this uncertainty is rapidly resolved, fleeting limit orders are submitted and quickly cancelled. This enhances liquidity supply, but leaves intact established comparative statics results on spreads. However, risk neutral liquidity suppliers are averse to persistent uncertainty due to concavity in the function describing limit order utility, and spreads widen. Th...

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Publication status:
Published

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Publisher:
University of Oxford Publisher's website
Series:
Department of Economics Discussion Paper Series
Publication date:
2004-02-01
Paper number:
2004-FE-04
Keywords:
Pubs id:
1140827
Local pid:
pubs:1140827
Deposit date:
2020-12-14

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